Company Analysis

COMPANY ANALYSIS 16

CompanyAnalysis

ExecutiveSummary

AppleInc. became established in 1976 by Steve Jobs as a computer company.However, over the past decade, the company has grown into a verycomplex business unit which is more than just a computer company(Lashinsky, 2012). Apple Company is in the consumer electronicsindustry. The purpose of this report is to provide a company analysisof Apple Company. The report will cover industry analysis of thecompany, financial analysis, segments, cash flows, ratios, andimpacts and risks of international trade on the company’s financialstatements. In addition, the report will also analyze the impact ofethical, regulatory, and tax considerations on the company’sfinancial policy decisions.

IndustryAnalysis

AppleCompany operates in the consumer electronics industry. In ConsumerElectronics Industry Outlook Report 2013, which was published byEuler Hermes, the revenues of the industry were projected to grow by2.4% in 2014 (ConsumerElectronics Industry Outlook, 2013).The device market comprising of computers, tablets, mobile phones,and laptops is projected to continue flourishing. This is becausebuyers are now focusing on the best combination of devices that canbe in a position to meet their needs and demands. Consumers are nowmoving from the desktop PC towards smart phones and tablets becauseof flexibility and movability issues (Gartner, 2014). In the ConsumerElectronics Report 2013, it has been indicated that technologyproducers focus on advancements in the creation technology so as tomeet the demand of customers. This industry will increase somecomfort as the economy grows. Tablets and smart phones will help inincreasing industry growth and connection is likely to increase ascustomers try to link up their homes, mobile apps and gadgets.Therefore, the overall industry is expected to grow given thatconsumers are more than willing to adapt to new technologies.

Financial Ratios

Liquidity Ratios

2014

2013

Quick ratio

1.05

1.64

Current ratio

1.08

1.68

Asset Utilization Ratio

Accounts Receivable Turnover

6.57

7.53

Inventory Turnover

57.94

83.45

Average Collection Period

54.79

47.81

Total asset Turnover

0.79

0.83

Leverage Ratio

Debt/Equity Ratio

1.08

0.68

Debt Ratio

0.52

0.40

Profitability Ratio

Gross Profit Margin

39%

38%

Profit Margin

22%

22%

Return on equity

35%

30%

Return on Asset

83%

89%

HorizontalAnalysis of Balance Sheet

Note: the values are in million dollars

2014

2013

Variance

Cash and Cash equivalent

13,844

14,259

(415)

Short-term marketable securities

11,233

26,287

(15054)

Accounts receivables, less allowances of $86 and $99, respectively

17,460

13,102

4258

Inventories

2,111

1,764

347

Deferred tax assets

4,318

3,453

865

Vendor non-trade receivables

9,759

7,539

2220

Other current assets

9,806

6,882

2924

Total current assets

68,531

73,286

(4755)

Long-term marketable securities

130,162

106,215

23947

Property, plant and equipment, net

20,624

16,597

4027

Goodwill

4,616

1,577

3039

Acquired intangible assets, net

4,142

4,179

(37)

Other assets

3,764

5,146

(1382)

Total assets

231,839

207,000

24839

Accounts payable

30,196

22,367

7829

Accrued expenses

18,453

13,856

4597

Deferred revenue

8,491

7,435

1056

Commercial paper

6,308

0

6308

Total current liabilities

63,448

43,658

19790

Deferred revenue-non-current

3,031

2,625

406

Long-term debt

28,987

16,960

12027

Other non-current liabilities

24,826

20,208

4618

Total liabilities

120,292

83,451

36841

Common stock and additional paid-in capital

23,313

19,764

3549

Retained earnings

87,152

104,256

(17104)

Accumulated other comprehensive income/loss

1,082

(471)

1553

Total shareholders’ equity

111,547

123,549

(12002)

Total liabilities and shareholders’ equity

231,839

207,000

24839

HorizontalAnalysis of Statement of Operation

Note:values are in million dollars

2014

2013

Variance

Net sales

182,795

170,910

11885

Cost of sales

112,258

106,606

5652

Gross margin

70,537

64,304

6233

Research and development

6,041

4,475

1566

Selling, general and administrative expenses

11,993

10,830

109163

Total operating expenses

18,034

15,305

2729

Operating income

52,503

48,999

3504

Other income/ (expense), net

980

1,156

(176)

Income before provision for income taxes

53,483

50,155

3328

Provision for income taxes

13,973

13,118

855

Net income

39,510

37,037

2473

VerticalAnalysis of Income Statement (amounts are inmillion dollars)

2014

Percent

Net sales

182,795

100%

Cost of sales

112,258

61.4%

Gross margin

70,537

38.6%

Research and development

6,041

3.3%

Selling, general and administrative expenses

11,993

6.6%

Total operating expenses

18,034

9.9%

Operating income

52,503

28.7%

Other income/ (expense), net

980

0.5%

Income before provision for income taxes

53,483

29.3%

Provision for income taxes

13,973

7.6%

Net income

39,510

21.6%

2013

Percent

Net sales

170,910

100%

Cost of sales

106,606

62.4%

Gross margin

64,304

37.6%

Research and development

4,475

2.6%

Selling, general and administrative expenses

10,830

6.3%

Total operating expenses

15,305

9%

Operating income

48,999

28.7%

Other income/ (expense), net

1,156

0.7%

Income before provision for income taxes

50,155

29.3%

Provision for income taxes

13,118

7.7%

Net income

37,037

21.7%

VerticalAnalysis of Balance Sheet (amounts are in million dollars)

2014

Percent

Cash and Cash equivalent

13,844

6%

Short-term marketable securities

11,233

4.8%

Accounts receivables, less allowances of $86 and $99, respectively

17,460

7.5%

Inventories

2,111

0.9%

Deferred tax assets

4,318

1.9%

Vendor non-trade receivables

9,759

4.2%

Other current assets

9,806

4.2%

Total current assets

68,531

29.6%

Long-term marketable securities

130,162

56.1%

Property, plant and equipment, net

20,624

8.9%

Goodwill

4,616

2%

Acquired intangible assets, net

4,142

1.8%

Other assets

3,764

1.6%

Total assets

231,839

100%

Accounts payable

30,196

13%

Accrued expenses

18,453

8%

Deferred revenue

8,491

3.7%

Commercial paper

6,308

2.7%

Total current liabilities

63,448

24.4%

Deferred revenue-non-current

3,031

1.3%

Long-term debt

28,987

12.5%

Other non-current liabilities

24,826

10.7%

Total liabilities

120,292

51.9%

Common stock and additional paid-in capital

23,313

10%

Retained earnings

87,152

37.6%

Accumulated other comprehensive income/loss

1,082

0.5%

Total shareholders’ equity

111,547

48.1%

Total liabilities and shareholders’ equity

231,839

100%

2013

Percent

Cash and Cash equivalent

14,259

6.9%

Short-term marketable securities

26,287

12.7%

Accounts receivables, less allowances of $86 and $99, respectively

13,102

6.3%

Inventories

1,764

0.9%

Deferred tax assets

3,453

1.7%

Vendor non-trade receivables

7,539

3.6%

Other current assets

6,882

3.3%

Total current assets

73,286

35.4%

Long-term marketable securities

106,215

51.3%

Property, plant and equipment, net

16,597

8%

Goodwill

1,577

0.8%

Acquired intangible assets, net

4,179

2%

Other assets

5,146

2.5%

Total assets

207,000

100%

Accounts payable

22,367

10.8%

Accrued expenses

13,856

6.7%

Deferred revenue

7,435

3.6%

Commercial paper

0

0

Total current liabilities

43,658

21.1%

Deferred revenue-non-current

2,625

1.3%

Long-term debt

16,960

8.2%

Other non-current liabilities

20,208

9.8%

Total liabilities

83,451

40.3%

Common stock and additional paid-in capital

19,764

9.5%

Retained earnings

104,256

50.4%

Total shareholders’ equity

123,549

59.7%

Total liabilities and shareholders’ equity

207,000

100%

CompanySegments

Theprimary business of Apple is designing, producing, and marketing ofmobile communication as well as other media devices, digital andportable music players, and computers. The company also sells varioussoftware which are related to their products, digital content, andsolutions of networking (Glowik &amp Sarah, 2014). Essentially, theservices and products of the company includes iPad, iPod, iPhone,Mac, Apple TViOS and OS X operating systems, iCloud, and differentaccessories. iPhone is the organization’s line of smart phones,which combines a music player, phone, and internet device in oneproduct. It is usually based on Apple’s iOS Multi-Touch operatingsystem. Mac is the organization’s line of desktop and portablePCs. Mac usually features Intel microprocessors, OS X operatingsystem and entail Safari web browser, Calendars, Mail, Messages,Contacts, Reminders and the iLife suite. This business segmentcontributes around 18.7% of the company’s revenues. iPad and iPadmini are the organization’s line of multi-purpose tablets on theground of Apple’s iOS Multi-Touch operating system. iPad works withthe iTunes Store, iBooks Store, and App Store for buying and playingmovies, music, podcasts, apps, books, and TV shows. This segment isconsidered to contribute around 53.5% of total sales. The company’siPod segment contributes around 12.5%. On the other hand, the iTunessegment contributes around 2.58%. iTunes is combined with the iBooksStore, the App Store, and iTunes Store. Furthermore, accessoriessuch as Logic Studio, Final Cut Pro, FileMaker Pro database, andLogic Pro software are also produced by the company. The accessoriessegment usually contributes around 3.33%.

CashFlow Analysis

Inthe analysis of cash flow, different ratios can be used indetermining whether the organization’s cash flow is healthy (Jury,2012). These ratios will be used in analyzing the cash flow of thecompany.

Operatingcash flow /Net sales ratio

Thisratio is usually expressed as a percentage and is used in indicatinghow many dollars of cash can be obtained for every dollar of sales.

Operatingcash flow / net sales = 13,844,000,000 / 182,795,000,000 (for 2014)

=7.6%

Thisratio indicates that the company obtains 0.076 dollars for everydollar of sales.

In2013 operating cash flow / net sales = 14,259,000,000 /170,910,000,000

=8.3%

Thisimplies that the company obtained 0.083 dollars for every dollar ofsales in 2013.

FreeCash Flow Ratio

Thisratio is usually calculated by deducting capital expenditures fromnet operating cash flow. A steady and consistent free cash flow is anadvantage to an organization since it indicates that an organizationhas a favorable investment.

Freecash flow (2014) = 13,844,000,000 – 11,000,000,000

=2,844,000,000

Thiscash flow is an indication that the organization has an excellent andfavorable investment.

Althoughthe net cash flow for the organization for 2013 was greater comparedto that of 2014, the organization made significant cash flows duringthe years. This makes the cash flow of the organization be consideredfavorable for investment.

CompanyRatios against Industry Averages

Ratios

Apple’s

Industry’s

Quick ratio

1.64

1.20

Current ratio

1.68

1.48

Debt/equity ratio

0.68

0.13

Net profit margin

21.67

20.65

Inventory turnover ratio

83.44

45.14

Price/earnings ratio

12.75

33.14

Return on asset

0.51

0.17

Return on equity

0.3

0.28

Asset turnover

0.83

0.82

Whenit comes to the comparison amid company ratios to those of theindustry, it is apparent that the organization performs almost thesame with the industry in accordance to some ratios, while at thesame time it performs above the industry’s performance according tosome ratios. As a matter of fact, the company can be perceived to beperforming above the industry performance. This is evident with someratios. For instance, the company has a higher quick ratio than theindustry, which is an indication that it is capable of meeting itscurrent obligations using available resources better compared to theindustry. A higher inventory turnover ratio compared to theindustry’s ratio is an indication that the company has the abilityof ordering and replacing its inventory more compared to the industryas a whole. However, when it comes to asset turnover and return onequity, the company and the industry have almost the same values,which is an indication that the organization is performing within thesame range as the industry.

Risksof International Trade on an Organization`s Financial Statements

Thereare different risks that may pose a threat on the financialstatements of the organization. One of the risks is the global andregional economic conditions. The operations of the company rely onthe global and regional economic conditions. Uncertainty concerningglobal and regional economic environment may pose a risk to thecompany since customers may tend to postpone their spending inattempt to respond to volatility in the financial market, negativefinancial news, higher unemployment, or declines in incomes amongother things. When customers become affected negatively by economicconditions, the demand for company’s products and services wouldautomatically go down. A decrease in demand for the company’sproducts and services would imply that the revenues for the companywould also decrease. This would adversely affect the financialstatements of the organization. For instance, a consistent drop inthe revenues of the company would lead to the company experiencinglosses. Another risk entails global market for the organization’sproducts and services being highly competitive and subject to rapidtechnological changes, and the organization may not be capable ofcompeting effectively in such markets. The products and services ofthe company compete in highly competitive global market, which ischaracterized by aggressive price cutting that result to downwardpressure on gross margins. The company has to ensure that it usesinnovation in order to maintain a competitive edge in the market. Incase the company is not in a position to continue developing andselling innovative new products that have attractive margins, theorganization’s ability to maintain a competitive edge could beaffected negatively. This would affect the incomes and gross marginof the company. This is an indication that the competitive market inwhich the company is operating in may pose a threat to the financialstatements of the organization.

Anotherrisk of international trade on the organization’s financialstatements is change in the exchange rates. The company does notoperate on a local ground, but focuses on different regions. Thisimplies that the organization can be affected by a change in exchangerate. Sometimes, there may be an economic downturn that may force theexchange rates to change affecting the earnings of the company. Whenthe earnings of the company become affected negatively, the financialstatements of the organization would also be affected negatively.Therefore, since the exchange rates may change in the future due toeconomic issues such as depression, there is a risk of the company’sfinancial statements being affected. Furthermore, operating in theinternational market poses a threat on the financial statements ofthe company. As it operates in different markets, the company needsto operate within a given legal framework from the region it isoperating in however, there is a threat since these legalrequirements may change from time to time. It may happen that therequirements may give the company some restrictions to a certainsegment that earns the company considerable revenues. This wouldimply that the revenues of the company would decrease a move thatwould affect the financial statements of the organization adversely.Hence, a change in the legal framework in a certain region may becomea threat to the financial statements of the company.

Impactof Ethical, Regulatory, and Tax Considerations on the Organization`sFinancial Policy Decisions

Ethical,regulatory, and tax concerns are exceedingly critical to anorganization as they help in keeping an organization as a goingconcern. Ethical issues entail whether an organization is doing whatcan be considered reasonable without causing harm to any business orindividual. The company needs to consider doing what is ethical sincenon-ethical behavior can adversely affect the operations of thecompany. When making financial decisions, the company must ensurethat it uses ethical standards. Failure of using ethics in itsfinancial decisions may lead to some failures in the company’soperations. For example, failure to use ethics when making financialpolicy decisions may lead to suing of the company for non-complianceto particular ethical standards. This may have a negative impact asit may make the company suffer reputation issues, leading to somebusinesses denying it an opportunity to have its products or servicesassociated with them. Regulatory considerations are also significantsince they can impact an organization’s financial policy decisions.In every part that the company operates, there is need to followgovernment regulations. Failure of following government regulationsmay lead to the company being denied operations certificate in thearea. This may affect the financial decisions policy of the companysince the company may exclude a restricted area when making financialdecisions. In addition, tax issues are critical and cannot beseparated from an organization. When considering tax, it is importantto consider incorporating tax in financial decisions. Failure toincorporate tax in financial decision policy may make the companynon-compliant in paying taxes a move which may lead to the companybeing sued (Alemanno, 2013).

Conclusion

AppleCompany is a major producer and developer of mobile interactiongadgets, PC systems, and digital press gamers. The company hasdeveloped favorable technological innovations which have changed thetelecom and computer sector rapidly (O`Grady, 2012). Apple Companyoperates in the consumer electronics industry. This industry isgrowing rapidly due to emerging technologies and consumers’ desireto adapt to new technologies. The company offers different productsand services which include iPad, iPod, iPhone, Mac, Apple TViOS andOS X operating systems, iCloud, and different accessories (Yoffie &ampRossano, 2012). The performance of the company is excellent this canbe deducted from the financial analysis of the company. From thefinancial ratios, it is evident that the company’s performance iswithin the range of the industry’s performance. This is because thefinancial ratios of the company do not compare with a greatdifference to those of the industry. The company is capable ofachieving further growth in the future in case it remains innovativeand keeps along with emerging technologies.

References

Alemanno,A. (2013). Betterbusiness regulation in a risk society.New York: Springer.

Apple,Inc. 10K (2013). Annual report.

Apple,Inc. 10K (2014). Annual Report.

ConsumerElectronics Industry Outlook (2013). Retrieved fromwww.Eulerhermes.us

Gartner,K. (2014). Consumer Electronics Association Report.

Glowik,M. &amp Sarah, M.B. (2014). Business-to-Business:A Global Network Perspective.New York: Routledge.

Jury,T. (2012). CashFlow Analysis and Forecasting: The Definitive Guide to Understandingand Using Published Cash Flow Data.Hoboken: John Wiley &amp Sons.

Lashinsky,A. (2012). InsideApple: How America`s most admired-and secretive-company really works.New York: Business Plus.

O`Grady,J. D. (2009). AppleInc.Westport, Conn: Greenwood Press.

Yoffie,D &amp Rossano, P. (2012). Apple Inc. in 2012, HarvardBusiness Review,pp 4-6.